Skip to content

David's Macro Blog

Analysis and commentary on business, economics, real estate, financial markets, and other fun topics

Archive

Tag: recession

Historically we often think of a recession as a sharp drop in economic output followed by a sharp rise. This is called the “V-shaped” recovery. The current “Great Recession” had a sharp downturn but so far no recovery after 18 months, and most talk is of an “L-shaped” or “U-shaped” rebound.

Why is this?

There’s an excellent post on Calculated Risk blog (one of my favorites) about economic growth engines that typically pull us out of recession with a sharp upward swing in activity.

The top two economic growth engines are residential investment and personal consumption expenditures.

Since we’ve had the largest residential real estate bubble in history and massive over-consumption, both due to very loose credit, these two growth engines are NOT poised to restart economic growth anytime soon.

In fact, just the opposite is true. Any recovery will be held in check by the massively overbuilt inventory of residential real estate and the inability of consumers to tap savings and credit to purchase consumer goods at the level needed to “stimulate the economy”.

Thus, while it looks like we avoided the Great Depression II, we’ll probalby remain in the Great Recession I for some time.

What do you think? Whether you agree or disagree, please add your comment below and show me you’re alive!

True investors want to purchase an asset at a discount to today’s fair market value. In the past, this was a big challenge for real estate investors. However, now that we are in a real estate recession, investors can finally purchase houses for significantly less than “today’s retail price.” One method to do this is at the court house steps through a trustee sale auction.

Watch the video below from my favorite realtor, Jim Klinge (aka Jim the Realtor).

Apparently Jon Mann, San Diego real estate professional investor, purchased this home yesterday. As Jim says Jon has been “on fire” buying 20 to 40 homes a month “just making a killing.”

Note: We’re doing something similar in the Phoenix market with our friends. It’s (finally) an exciting time to invest in real estate!

Was the great real estate bubble of 2000 – 2007 preventable?

Who won and who lost?

Why weren’t the inevitable crash and current historic recession preventable or predictable by the best the brightest among us?

The following video from CNBC’s “House of Cards” (ht – Alan Sun) contains interviews with people in all parts of the real estate food chain: from borrowers to loan officers to lenders to wall street bankers to hedge fund operators to bond ratings analysts.

Wall Street will create what they can sell until there are no more buyers. This generates seemingly safe fee income which boosts quarterly profits and of course also produces undeserved multi-million dollar bonuses.

It is hard to believe now, but the banker’s financial models predicted 6% to 8% annual housing price increases forever into the future. How was this sustainable when household income wasn’t rising and probably wouldn’t rise much with global wage arbitrage? Many of the people on the front lines of this historic boom were young home buyers, recent MBA grads at Wall Street firms, etc. They had never known a down real estate market. It couldn’t even occur to them from experience that real estate goes anywhere but up in price.

The boom couldn’t start without Wall Street securitizing loans and selling them off to investors (many of them overseas). What type of WS culture creates an environment where there is strong incentive to sell what the market will buy and book a trading profit or fee income? No one had any incentive to stop the lucrative money train.
– Home buyers bought more house than they could afford.
– Loan officers originated more loans and earned significant income for basically just helping borrowers fill out a form (loan app).
– Wall Street bankers generated massive bonuses for themselves and quarterly profits for their firms.
– Rating agencies earned more fees rating mortgage backed securities (MBS) as AAA.

Isn’t it startling that nowhere was a fundamental issue like a borrower’s ability to service a loan and pay on time for 30 years ever discussed or considered?
The economic boom was NOT about fundamental value creation but solely a product of easy credit. Housing prices historically rise about 1% a year in line with increases in household income. They will revert to the mean over time. Essentially, there is no new economy or new economics. When we hear that in the MSM (mainstream media), look for the unsustainable bubble and prepare for it to end.

Why couldn’t Alan Greenspan, our economic “maestro”, our foremost authority on finance, interest rates and a stable economy, have warned us about the unsustainable boom and subsequent global economic collapse? He didn’t see the bubble. To make matters worse, he says:
“there is no doubt that somewhere in the future, we’ll have this conversation again. It will not be for quite a period of time, but it will occur because the flaws in human nature are such that we cannot change that, it does not work.”

Will you remember that all booms go bust?

Will you remember that what cannot go on forever must end?

Will you remember what your parents taught you? Just because everyone is doing it, doesn’t mean you have to do it too.

If history is any guide, almost all of us will forget what we learned by the time the next boom starts. Scary thought, isn’t it?